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Did you know this about ELSS schemes?

As the tax-savings season nears, we start running around to find the best tax-saving investment. Tax-saving mutual fund or Equity linked savings scheme (ELSS) is one of the popular tax-saving options. Almost all of us are aware that there is a lock-in of 3 years. However, there are a few aspects that many of us aren’t aware of (even I wasn’t aware of some of these points until I came across such aspects in a blog post).

Equity Linked Savings Scheme (ELSS), 2005 were notified by the Finance Ministry (and not SEBI). Hence, ELSS schemes are governed by these rules in addition to those put down by SEBI for mutual funds. To be honest, these rules will not change your opinion of ELSS but it is good to know these rules.

1. Investment shall be in multiples of Rs 500 with minimum investment being Rs 500.

2. ELSS units can be transferred, pledged or assigned only after 3 years.

3. The scheme shall be open for a minimum period of 3 months during a financial year. This aspect is not so important though. Majority of the ELSS schemes, in practice, are open ended schemes. Hence, you can invest in such schemes all year round.

4. If you invest in ELSS through SIP, every SIP installment is a fresh investment. This is where I have seen a few investors get confused. Such investors were under the impression that the lock-in of 3 years was from the date of first investment in ELSS. That is not the case. By the way, every investment (and not just through SIP) is a fresh investment.

For instance, if you purchase units through SIP installment on December 15, 2016, units purchased through this installment shall be locked in till December 15, 2019. Units purchased through SIP installment on January 15, 2017 shall be locked in till January 15, 2020.

This is an important aspect. Many proponents of ELSS (for tax-savings) argue that ELSS has the shortest lock-in period among all Section 80C investments. However, what is conveniently ignored is that every investment in ELSS is subject to a fresh lock-in of 3 years.

Under PPF, only your first investment is locked for 15 years. For a PPF account which is 12 years old, the lock-in is only for 3 years. For an account which has completed initial maturity of 15 years and has been extended, the maximum lock-in is 5 years. By the way, you can make partial withdrawals and take loans against your PPF balance.

I am not saying PPF is better than ELSS. However, you need to understand the fine print of the regulations before making a decision.

5. The fund can be invested in equity, cumulative convertible preference shares and fully convertible debentures and bonds. There are a few more conditions (not as useful though). 80% of the funds should be invested in aforesaid securities. Remaining 20% of the assets can be parked in money market or liquid investments to handle redemptions. There are a few exceptions though.

6. As I understand, ELSS funds cannot invest in arbitrage.

7. The restriction on investments (Point. 6) need to be seen with another Income Tax rule where the fund needs to invest 65% into equities to maintain equity status (for taxation)

8. Each AMC can have just one ELSS scheme. Many have multiple schemes, by the way.

9. In the event of death of the investor, the nominee or the legal heir can withdraw the amount only 1 year after the date of allotment of units to the deceased. Hence, if the investor dies six months after purchasing the units, the nominee has to wait for at least six more months to be able to sell the units. Note nominee can get the units transferred to him/her much earlier but can’t sell those until 1 year is over. Essentially, the lock-in period goes down from 3 years to 1 year in the event of demise of the original investor.

To be honest, there is not much in these rules that will make or break your decision to invest in ELSS. But it is always good to know.

Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

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Comments

I have invested in Axis Long Term ELSS MF via SIP mode. It has been 2 years. 1st SIP dated 15th December, 2014.But at that time I didn’t know difference between Regular & Direct Plan.Now I want to switch to direct plan. I have some doubts regarding switching and lock-in period for existing regular plan. Hope you will clarify.

Doubt 1: I plan to stop monthly payment to my existing ELSS regular plan, but I will not withdraw units earned until respective units don’t complete 3 years lock-in period; my query is, “Will I incur exit load or any other charges if I don’t invest anymore i.e. if I stop monthly payment from 15th Jan 2017 but not withdraw units earned? Do I have to keep investing for 3 years i.e till December 2017 in the case of this ELSS SIP?”. I understand that every SIP is fresh investment & is locked in for 3 years.

Doubt 2: I have declared this investment for tax deduction but if I stop SIP & don’t pay for remaining financial year what I need to do in regards of that. And can I claim money invested so far i.e. from April 2016 to December 2016; 5000*9= 45000 for the tax deduction? Also, I want to claim new investment of 5k per month in the Axis ELSS direct plan which I want to start in this month itself. How do I correct tax deduction details I have declared earlier as I am stopping payment henceforth?

Doubt 3: Should I start fresh SIP under direct plan & invest existing regular plan units when they mature in this fresh direct plan as lump sum apart from my monthly payment of 5k in a direct plan?And also if in my fresh ELSS direct plan, suppose I start SIP of 5000 per month, can I invest any random amount at any random date in the same direct plan apart from my monthly auto-debit of 5000 rupees?

Doubt 4: Is it a good idea to invest in ELSS over other MF plans just to save tax? I am planning to increase my current invest of 5k per month to 8k per month in ELSS for tax deduction purpose. Also, will it be better if I invest SIP of 4k in Axis ELSS & 4k in DSP Blackrock ELSS or should I invest 8k alone in Axis ELSS?

Waiting for your reply. Thank you in advance. I admire all your articles and plan to read all of them.

Dear Sumit,You are welcome.1. There is no exit load implication on stopping a SIP. Exit load and capital gains implications arise only at the time of redemption of units.2. You get deduction for both direct and regular plans. Hence, nothing to worry about. You can stop regular plan SIP and start direct plan SIP. Tax man will be least worried.3. Yes, that is an option you have. Yes, you can invest on any random date. SIP is merely a way to invest (and not the investment itself).4. There is no conclusive evidence that ELSS is better than non-ELSS funds. Personally, I wouldn’t invest more than I am required to meet my Section 80C limit. However, nothing wrong if you do that. Can’t comment on specific schemes.

Yes… I have already recommended your Website to my roommates! Will share it with anyone who is interested.Honest work will always attract more customers!Hope to see the day when more people stop paying heed to agents & distributors involved in insurance, Mutual Funds or any other schemes. They dupe common people big time.We need more impartial financial advisors like you.I am planning to buy one of your offerings once I get salary bump next year.

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